VZCZCXRO5336
RR RUEHDBU RUEHSL
DE RUEHKV #2133/01 3481219
ZNY CCCCC ZZH
R 141219Z DEC 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 8964
INFO RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

C O N F I D E N T I A L SECTION 01 OF 03 KYIV 002133 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR, EUR/UMB, EEB/OMA 
 
E.O. 12958: DECL: 12/13/2019 
TAGS: EFIN EREL ETRD PGOV PINR UP XH
SUBJECT: UKRAINE'S "SCARE TACTICS" OVER IMF LOAN 
 
REF: A. KYIV 2130 
     ¶B. KYIV 2102 
 
Classified By: Economic Counselor Edward Kaska for Reasons 1.4 (b) and 
(d) 
 
¶1.  (C) Summary.  Kyiv-based IMF resident representative Max 
Alier told Econoff on December 11 that GOU representatives 
deliberately misled Ukrainian and international media outlets 
into believing that Ukraine had met the IMF's "primary 
demands" for releasing a fourth loan tranche.  Alier 
reiterated that the IMF's "very reasonable" conditionalities 
were firm and still unmet.  He speculated that Prime Minister 
Tymoshenko was "letting out all the horses" to put pressure 
on the European Union, Russia, and the United States to weigh 
in with IMF management to again ease the conditions for 
disbursal.  Alier did not discount further GOU "scare 
tactics" over a gas shutoff, social unrest, or a default on 
domestic debt.  End Summary. 

NEMYRIA'S FALSE POSITIVE 
------------------------ 
 
¶2.  (C) Alier passed on Deputy Prime Minister Nemyria's 
readout to him from December 6 talks in Washington with IMF 
and USG officials, which Alier said was "surprisingly 
positive".  The Deputy Prime Minister told Alier that he 
thought a disbursement could be done in a few days, and he 
said the GOU was pushing to include the subject of an 
emergency loan to Ukraine on the next IMF board meeting 
agenda. 
 
¶3.  (C) Alier told Econoff, however, that IMF management was 
against the idea of a fast-tracked loan, especially without 
support from IMF mission director Ceyla Pazarbasioglu or a 
completed staff-level review.  Further concessions on IMF 
conditionalities were unlikely, he said.  The IMF was firm in 
its view that it had already been "very reasonable" with its 
still unmet demands of Ukraine's authorities (ref B). 
 
GOU MEDIA SPIN ON IMF LOAN 
-------------------------- 
 
¶4.  (C) Alier noted with concern that Nemryia had taken his 
interpretation of the Washington talks to Ukrainian and 
international media outlets, which widely reported on 
December 11 and over the weekend that the GOU had made 
progress in its negotiations with the IMF.  Nemyria was 
quoted by no fewer than a dozen international media outlets 
as stating that Ukraine had met the IMF's "primary demands" 
and was hoping for a loan disbursement to avert another 
January gas crisis.  Nemyria told media that the lack of an 
IMF disbursement would be a "fatal error" and could 
destabilize the eastern European region.  Nemyria's 
spokeswoman stressed that the IMF money was needed to pay 
Ukraine's January 7 bill to Gazprom. 
 
¶5.  (C) Prior to his meeting with IMF deputy managing 
director Lipsky in Washington, Foreign Minister Poroshenko 
was similarly quoted on December 11 to have said there would 
be a "higher risk" of gas supply disruptions to Europe if 
Ukraine did not receive an IMF tranche.  (Note: Poroshenko 
privately clarified his position with the Ambassador on 
December 13, suggesting that Ukraine could probably pay its 
gas bill in January, but that the situation was precarious 
and would be even worse in February without external support.) 
 
¶6.  (SBU) Local commentary on the GOU's statements has been 
mostly derogatory.  A Ukrainian business daily declared on 
December 14 that Tymoshenko was attempting to put 
"psychological pressure" on the IMF.  Another pundit noted 
that the IMF loan was needed more by the government than the 
economy as a whole. 
 
GOU PRESSURE FOR DISBURSAL 
-------------------------- 
 
¶7.  (C) The IMF's Alier characterized Nemyria and 
Poroshenko's public statements as "scare tactics" designed to 
pressure the European Union, Russia, and the United States to 
weigh in with the IMF.  "You can't imagine the number of 
calls" the IMF had received in response to the media stories, 
including from Russia, Alier said.  "The Prime Minister was 
playing all sides, not necessarily against each other but to 
her advantage," the IMF had concluded.  Alier warned that 
Ukraine's partners should take Tymoshenko's assurances "with 
a big grain of salt". 
 
¶8.  (C) The Prime Minister was "willing to promise anything 
to anybody" to make budget, gas, and domestic debt payments, 
according to Alier.  Alier predicted Tymoshenko would use 
public relations messaging to threaten a gas shut off, social 
unrest, or a sovereign default on domestic debt.  In his 
words, Tymoshenko was "letting out all the horses." 
 
THREATS OF GAS DISRUPTION NOT CREDIBLE 
-------------------------------------- 
 
¶9.  (C) Alier said the GOU's talk of gas transit disruptions 
were not a credible ploy to instigate European support for 
emergency lending.  The Europeans had learned their lesson 
from January 2009; most countries reliant on Ukraine for 
transit flows now had enough gas in storage to last through 
the winter heating season.  Instead, Europeans had become 
cynical about Ukrainian duplicity and tended to believe 
Russian messages blaming Kyiv for problems with energy 
security.  Alier said that the January 7 payment to Gazprom 
was "likely, but in the hands of the Prime Minister". 
 
THE "SOCIAL UNREST" CARD 
------------------------ 
 
¶10.  (C) The IMF official focused heavily on the possibility 
of social unrest, which he predicted could be the GOU's "next 
escalation".  Alier speculated that Tymoshenko might choose 
to encourage or support protests, but that such a tactic 
would backfire.  He predicted that the Prime Minister could 
instead find herself in the position of being a lightning rod 
for public discontent. 
 
IMF ON UKRAINE DEBT DEFAULT 
--------------------------- 
 
¶11.  (C) GOU fears over December domestic debt payments could 
be justified, but Alier downplayed the foreboding concerns 
expressed to Econoff by Deputy Minister of Finance Kravets on 
December 11 (ref A).  The IMF had calculated that the GOU 
needed to repay or rollover UAH 1.8 billion ($225 million) in 
domestic debt by the end of December.  The Ministry of 
Finance's plans for December auctions of short-term treasury 
bills would likely only raise enough to cover domestic debt 
servicing, one-third of which was owed to the National Bank 
of Ukraine (NBU).  The IMF was not aware of any cross-default 
covenants that could be triggered by non-payment of maturing 
domestic debt, but Alier did not rule out the possibility 
that such existed.  In any case, threatening defaults to gin 
up emergency external lending would be a "very negative 
action", said the IMF official. 
 
BUDGET SITUATION STILL WORSENING 
-------------------------------- 
 
¶12.  (C) Arrears of public sector wages and pensions were 
already visible, according to the IMF, even though Tymoshenko 
had determined to do "whatever it took" to make these 
payments.  The month of January 2010 would be no better; not 
only had taxes been paid in advance, revenues were still 
collapsing as a result of Ukraine's GDP decline and the lag 
effect "catching up" on the real economy.  (Note: Although 
Alier stated that there are visible wage and pension arrears, 
our assessment is that these are localized and not widespread 
to date.  Alier did not elaborate or provide evidence to 
support his claim.  End note.) 
 
NBU'S PERFECT COVER 
------------------- 
 
¶13.  (C) The NBU was in a position to monetize GOU securities 
without causing inflation or dangerously depleting reserves, 
according to Alier, but its decision to help the GOU make 
budget, gas, or debt payments would continue to be 
politically motivated.  NBU Governor Stelmakh was waiting 
until the last minute before the presidential election to 
throw his support behind either Tymoshenko or opposition 
Party of Regions leader Yanukovych.  If the former appeared 
to be gaining ground, Stelmakh would likely turn on the 
printing presses.  If Yanukovych looked set to hold on, 
Stelmakh would refuse to concede. 
 
¶14.  (C) President Yushchenko was providing the perfect cover 
to the NBU, allowing Stelmakh to maneuver between both 
Tymoshenko and Yanukovych.  Stelmalkh's signing of the IMF 
Letter of Intent gave him some credibility with the Prime 
Minister.  However, Alier speculated Stelmakh had also told 
Yanukovych that the NBU Governor's signature was meaningless 
without Yushchenko's support (ref B), and that it did not 
count as a vote for Tymoshenko.  According to Alier, Stelmakh 
knew the stakes were high.  His actions could help decide the 
presidential race, as well as determine whether he would be 
prosecuted by Yushchenko's successor for what the IMF 
acknowledged were his many misdeeds. 
 
COMMENT 
------- 
 
¶15.  (C) IMF resident representative Alier's comments reflect 
real disillusionment towards Ukraine within the Fund. 
Notwithstanding Deputy Prime Minister Nemyria's misleading 
suggestions to the public, the IMF will not weaken its 
resolve on conditionalities before the presidential election. 
 IMF staff-level experts clearly interpret the GOU's threats 
as negative and exaggerated, perhaps even further reducing 
the likelihood of additional "flexibility".  Alier's 
assessment that the NBU will act as a spoiler (or kingmaker) 
appears correct, especially if Yushchenko extends Stelmakh's 
term after the NBU Governor's formal retirement tomorrow. 
TEFFT